Scale of corporate default, restructuring will rise

As businesses continue to be affected by the ‘new normal’, many are expected to restructure their debts after the moratorium ends on Sept 30


MORE corporates are expected to descend into defaults as the business disruption brought about by the Covid-19 pandemic continuing to unfold resulting in significant financial and operational restructuring across many industries.

Ernst & Young (EY) PLT (turnaround and restructuring strategy) senior ED Khoo Poh Poh said while the banks continue to extend support to viable businesses, it is paramount that companies equip themselves with the right competencies, experiences and resources to navigate the complexities of financial restructuring and turnarounds.

“The government has initiated several stimulus packages and relief measures such as the loan moratorium to support businesses during this challenging time.

“However, as some of the measures, including the loan moratorium, come to an end, there are clear concerns as to whether some of the borrowers will be able to meet their obligations,” she said in a statement.

In a recent live poll conducted during an EY webinar on “Turnaround and Restructuring: The Banker’s Perspective”, 77% of the respondents shared that business profitability is expected to improve in the next 12 months but unlikely to be at pre-Covid-19 pandemic levels.

The poll findings also revealed that respondents recognise the need to fundamentally change their business model to reflect the current market environment (77%) and prioritise costs and revenue optimisation to manage the business and debt obligations in the next 12 months to 18 months (68%).

However, nearly half (43%) of the respondents do not think or are uncertain the debt level they are carrying is sustainable, suggesting businesses may need to restructure their debts once the loan moratorium ends.

As businesses continue to be affected by the “new normal”, many are expected to restructure their debts after the moratorium ends. Banks have been proactively engaging with their customers ahead of the expiry of the moratorium.

Yet, as some businesses embark on a financial restructuring route, some may need to recapitalise their businesses through a “White Knight” participation, while others may prefer to retain control via ”self-rescues”, focusing on new business models and operational turnarounds.

EY Solutions LLP Partner (strategy and operations) Sriram Changali said White Knights do not only bring in new monies and business but in some cases, new competencies and skills to complement existing management.

However, he stressed that there are downsides when a White Knight is involved in a financial restructuring exercise.

To ensure the White Knight’s investment is commercially viable, he said the existing shareholders and creditors tend to take higher haircuts and experience lower returns.

“Financial restructuring is not only dependent on a business’ financial projections, it is also driven by the design of the recourse or the mechanics to manage forecast risks and defaults.

“A well-designed mechanism should be able to close any gaps in the forecast by automatically converting the shortfalls to ordinary shares or equity-related instruments to effectively negate any future risk of default,” he said.

The complexity of financial restructuring is also dependent on whether a business can secure the necessary support from its creditors.

There are existing corporate rescue mechanisms and forums that bind the creditors to the business’ proposed financial restructuring, provided a majority vote is secured.

EY (turnaround and restructuring strategy) senior ED Leong May Lee said restructuring can be carried out via a few modes of corporate rescue mechanisms, including the scheme of arrangement, judicial management and corporate voluntary arrangement.

“There is also the corporate debt restructuring committee platform established by Bank Negara Malaysia (BNM) which corporate borrowers can turn to, to work out feasible debt resolutions with their creditors,” Leong shared.